(2025) Tax-saving model: rules for renting to relatives

Renting at a reduced rate to family members, particularly children, offers tax advantages: Although the rent is below market level, all expenses can be deducted as income-related expenses under certain conditions. This model is particularly suitable when high depreciation and interest on loans meet lower rental income. The arrangement is also recognised for tax purposes for dependent children.

Current regulations for reduced-rate rental

Since 01.01.2021, there are three tiers:

• At least 66% of the local rent:
  Income-related expenses are fully deductible – no forecast required.
• Between 50% and 66%:
  A positive total surplus forecast is necessary to deduct all income-related expenses. If the forecast is negative, expenses must be partially reduced.
• Less than 50%:
  The use is considered partially gratuitous. Income-related expenses are only partially deductible for the paid part.

Legal basis: § 21 para. 2 EStG

Arm's length comparison: Rental agreements with family members

Even when renting to dependent children, tax recognition is possible if the rental agreement withstands an arm's length comparison. This means:

• Legally validly concluded
• Clearly and unambiguously regulated
• Actually carried out as agreed

The BFH emphasises: “Strict requirements are placed on the proof of the seriousness of contractual arrangements between closely related persons”
(BFH ruling of 16.02.2016, IX R 28/15).

Example: If the rent is only offset against the maintenance claim and not actually paid, there is no paid rental relationship. In this case, the use of the apartment is considered maintenance in kind – income-related expenses are not deductible.

Tip: Pay cash maintenance and let the child transfer the rent themselves.

How is the local rent determined?

The basis is the local rent index. If there is a different rental for a comparable flat in the same building, the rent index still takes precedence. Only if no rent index is available or suitable can the local rent be determined alternatively – for example:

• through an expert report
• via rental databases
• or based on at least three comparable properties

BFH ruling of 22.02.2021, IX R 7/20

Generous properties: Total surplus forecast despite 66% limit

Even if the 66% limit is met, a total surplus forecast is mandatory when renting particularly large or elaborately designed properties.

Example:
Parents rent three villas (> 250 sqm) to their children. Losses of between 172.000 Euro and 216.000 Euro per year occur. The BFH does not recognise the losses – it is hobby as no intention to generate surplus was proven.
BFH ruling of 20.06.2023, IX R 17/21

Total surplus forecast for special properties

A 30-year forecast is required for:

• Living areas over 250 sqm
• Luxury fittings (e.g. swimming pool)
• High running costs

In similar cases, the BFH had already made it clear that the market rent for such properties does not reflect the actual living value. Therefore, it must also be checked whether the rental generates a surplus over the term (e.g. BFH rulings of 30.09.1997, IX R 80/94 and 06.10.2004, IX R 30/03).

Important:
The 66% rule only concerns objective remuneration.
The subjective intention to generate income can be additionally checked even if the limit is met.